Proactive Solutions For FCPA Investigations And Compliance

Wednesday, August 1, 2007 - 00:00

Editor: Please tell our readers about your practice at UHY.

Jaffe: UHY International, one of the world's leading business advisory, consulting and accounting networks, operates in189 offices in 57 countries with 4,500 professionals. In the U.S., UHY Advisors has about 1,500 professionals in 22 cities in various practice areas - business consulting, audit and tax, enterprise risk assessment, and forensic, litigation support and valuation services.

My area of expertise focuses on global business intelligence and investigations. We provide companies with strategic insight as they prepare to enter new foreign markets, make acquisitions, deal with internal and external fraud and related problems. Our due diligence services include a thorough analysis of operational risk of the businesses, the country(ies) they are entering, both culture and business practices, areas of vulnerability, and the respective decision makers. We provide our clients the necessary information to make informed business decisions and to minimize potential risks.

Harfenist: I work closely with the global business intelligence group in the course of our investigations. I focus more on the financial, accounting and investigative issues. One of the major benefits of our practice group is the integrated range of skill sets in our firm. We can service all aspects of an investigation from beginning to completion. For instance, I work with our enterprise risk assessment group to evaluate internal controls, our eDiscovery group on document acquisition, and with the global intelligence group to gather needed background information. My group focuses on analyzing the accounting data and supporting documentation to determine whether any financial irregularities, internal fraud or FCPA violations exist or occurred.

Rudewicz: I work with clients to help them prepare or respond to potential crises. This includes working to develop training and compliance programs to prevent those crises from occurring and mitigating the risk associated with such crises. For example, when a company is served with a federal subpoena or faced with a high profile inquiry, our response teams can provide immediate assistance, determining what resources and actions need to be taken. Our wide range of services and geographical capabilities provide the precise expertise needed to enable the target company to focus on its core business and properly address and respond to the government inquiry.

Editor: At what stage in an internal investigation do you typically come in?

Rudewicz: We have been retained at all stages of an investigation. If there is a government inquiry, we are typically called when the company is initially contacted. Based on our unique ability to identify and address potential liabilities, we are being called more frequently to provide proactive measures and to conduct "red flag due diligence" to identify potential vulnerabilities. We help our clients to mitigate vulnerabilities so that they do not become targets of high profile inquiries.

Editor: Why has compliance with the FCPA been problematic for some multinational corporations?

Harfenist: Companies are under great pressure to meet revenue and earnings targets, and penetrate emerging markets. Companies may also be pressured to engage in questionable or prohibited practices to remain competitive with competitors. Further, there are employees who do not fully understand what the rules prohibit. For instance, there are countries in the Far East where gift exchange is a common occurrence between business partners, where not accepting a gift may be considered offensive to the offering party. Engaging in these practices without fully understanding the FCPA can result in a possible violation.

Jaffe: In addition to knowing what activities trigger an FCPA violation, companies also must maintain records that accurately reflect transactions and dispositions of assets and systems of internal accounting controls. Accounting and record keeping provisions apply to all payments, not just to sums that would be material in the traditional "audit" sense. U.S. companies are required to assure compliance with the accounting provisions by foreign affiliates they control in a manner consistent with SEC, FCPA, Sarbanes-Oxley and DOJ requirements, among others.

Rudewicz: Companies struggle with compliance due to the difficulty in deciding how certain information is disclosed. For example, a company may determine that just disclosing the amount paid to a consultant is sufficient to satisfy the FCPA. However, what the consultant did with the money and whether an official or some one else was paid may be an FCPA violation, exposing the company to liability.

Editor: Given the exposure companies face from third-party activities, what can a company do to ensure that they adhere to the company's FCPA policies?

Jaffe: With proper corporate policies and codes of business conduct in place the company needs to ensure that everyone in the organization understands the meaning and how the FCPA requirements and the code of business conduct are being implemented. All employees are responsible to follow corporate procedures, including appropriate schedules of authorization and internal auditing controls, for reporting business transactions. A training program should be in place to ensure that everyone understands what has to be done. Personnel in the U.S. and overseas should endorse these policies. Internal controls must be institutionalized and the company must monitor and test what is required under the law to determine what occurs in its operations.

Harfenist: Agreements with agents and other facilitators must include "look through" provisions providing the company with access to their partner's financial records. Without this ability, companies will not be able to effectively control or understand where the money is going.

Editor: When investigating an alleged FCPA violation, do you work primarily with general counsel or outside counsel?

Jaffe: An FCPA investigation is a team effort with multiple components that have to be addressed. Because of the ramifications of FCPA and other fraud investigations, we attempt to conduct the investigation in a manner designed to protect the attorney-client privilege. This works best when outside counsel is involved in the process. If inside counsel is the gatekeeper of conduct for the company, and depending on to whom inside counsel reports, reporting to inside counsel may compromise the independence of the investigation.

Rudewicz: The reality is that outside counsel in this area of the law are the specialists. Inside counsel, regardless of their experience, typically rely on outside counsel's expertise.

Editor: How should the investigation be structured to preserve the attorney-client privilege?

Rudewicz: Many corporations are concerned with government pressure to waive the privilege during these investigations. Often, the government's perception appears to be that failure to waive the privilege is viewed as uncooperative. There is a distinct difference between cooperating with an investigation and consenting to a privilege waiver. Proper protocols should be in place to protect those areas that need to be protected.

Jaffe: Although efforts will be taken to assure privilege, there is no absolute guarantee that the privilege will be protected. Everyone involved in the investigation needs to be properly instructed and have a thorough understanding of how information is to be incorporated or recorded.

Harfenist: When engaged in an internal investigation, everything is filtered through outside counsel before it is disclosed to the client or anyone else. We understand that we are working under the umbrella of counsel as the lead investigator, so we do not disseminate any information to any party other than to the law firm that is running the investigation. Our memoranda and communications go through counsel in order to protect the privilege.

Editor: Has the passage of the McNulty Memo reduced the pressure that companies face to waive the privilege?

Jaffe: As the ABA White Collar Crime Section, the American Corporate Counsel Association and others, the bills now pending in Congress with regard to privilege and waiver and the recent SDNY/KPMG dismissal indicate, there is still wide spread belief within the corporate community that there is significant pressure from the government to cooperate.

Rudewicz: While the McNulty Memo changed previous memos with respect to privilege waiver, there is still a large concern in the corporate world with this pressure. In the middle of an inquiry, a company is frequently faced with inordinate negative publicity. Decisions to waive privilege sometimes occur as a means to appear friendly to the government. This is an area that has to be carefully thought out with outside counsel.

Editor: What factors do you consider when deciding how a matter should be staffed?

Harfenist: Our philosophy is simple but direct - always bring the best people to the table. In investigations involving needed assets in overseas venues, we take steps to assure high quality control. We have a strict method of planning, work product review, partner involvement, and a commitment to placing experienced people on-the-ground to manage the process. For overseas investigations, we also involve professionals from our international partners with the requisite language skills, as well as knowledge of local customs and practices.

Editor: Should companies establish uniform policies and procedures for FCPA compliance across global operations?

Jaffe: There should be uniformity in the code of business conduct to ensure compliance internally and with the FCPA. A company may vary as to how it trains its personnel or the procedures in each country, but uniformity in the ultimate goals and strategies is requisite. Records keeping policies that secure management control of assets should be uniform throughout an organization.

Harfenist: The policies and protocols have to be formal and standard enough to give it that necessary structure and consistency, but they have to be flexible so to be customized and appropriate for each locale.

Editor: How often should these policies be tested?

Jaffe: Effective compliance programs cannot be tested only in announced annual inspections. Spot checks at various times depending on the locale and other monitoring are required. Similar to the testing done as an inspector general or internal auditor of a large governmental or private organization, an ongoing program to make sure that employees comply with the FCPA and the company's code of business conduct is necessary. No company can afford to be lax in an environment where the government has expressed its interest in FCPA prosecution and enforcement and where overseas growth is booming.

Editor: When considering acquisition of a foreign company, what advice do you have for companies to ensure that the company has not violated the provisions of the FCPA?

Harfenist: In addition to doing the standard due diligence, there are additional steps to take. Those include analytical procedures that provide the acquiring company with a level of comfort that they are not acquiring a substantial financial liability; analyzing those areas where FCPA violations are usually buried or disguised within the financial statements. We have developed tools and analytical procedures that help us identify suspect areas and allow us to go in and dig deeper using a hands-on review. It is critical that the company know what it is buying.

Jaffe: We identify a series of "red flag" issues that we look into with our clients to get a sense of the FCPA risk from the employees, agents, company finances, and business location. We look at customs, practices and habits and people's willingness disclose information. If you go into a foreign country and deal with agents that will not answer your questions and are not open and candid, that is a good indication that you may run into a problem.

Please email the interviewees at jharfenist@uhy-us.com, jjaffe@uhy-us.com or frudewicz@uhy-us.com with questions about this interview.